Transmetro Corp Ltd v Kol Tov Pty Ltd [2009] NSWSC 350 | Case summary

5576/07 TRANSMETRO CORPORATION LIMITED & ANOR v KOL TOV PTY LIMITED & ANOR JUDGMENT 1 I am dealing with an application under s 237 of the Corporations Act 2001 (Cth) by Mr McEvoy for leave to bring certain proceedings on behalf of two companies, Kol Tov Pty Limited ("KT") and Kol Tov Operations Pty Limited ("KTO"). KTO is a wholly owned subsidiary of KT. 2 The proposed proceedings are by way of a second cross-claim in an existing suit. I should begin by describing the existing proceedings. 3 The proceedings were commenced in November 2007 by Metro Hotel Sydney Pty Ltd ("Metro") and Transmetro Corporation Limited ("Transmetro") as plaintiffs against KT, KTO and Mr Caplan as defendants. The claims those plaintiffs advance are now pleaded in an amended statement of claim filed on 23 February 2009. 4 KT was at material times the owner of a hotel in central Sydney. KTO was licensed by KT to operate the hotel. In April 2005, Metro was appointed by KTO to manage the hotel. Transmetro, which is the holding company of Metro, consented to the appointment. The appointment was by means of a management agreement dated 18 April 2005, the parties to which were KTO, Metro, KT and Transmetro. Transmetro guaranteed performance by Metro, its subsidiary. The appointment of Metro as manager of the hotel was for a term of ten years. 5 In November 2007, KTO purported to terminate the management agreement pursuant to its clause 16.2. The principal claims made by Metro and Transmetro in the amended statement of claim are claims for a declaration that the notice of termination was not a valid notice having effect under clause 16.2 and a declaration that the management agreement remains in full force and effect. 6 There is an existing cross-claim by KTO against Metro. KTO seeks a declaration that it validly terminated the management agreement. 7 The proposed second cross-claim that Mr McEvoy wishes to bring on behalf of KT and KTO names as cross-defendants Mr Caplan (one of the existing defendants), Mr Leslie and Mr Lesnie. These three gentlemen are said to have been, at material times, directors of KT and directors of KTO. Mr McEvoy himself was (and is) also a director of KT but not KTO. The central allegation is that Mr Caplan, Mr Leslie and Mr Lesnie sought to have KTO terminate the management agreement and to oust Metro as manager in order that Aspen Hotels Management Pty Ltd ("Aspen") might become the manager of the hotel in place of Metro. Mr Caplan, Mr Leslie and Mr Lesnie all had financial interests in Aspen. The alleged actions of Mr Caplan, Mr Leslie and Mr Lesnie, in permitting or procuring termination of the management agreement by KTO, are said to have involved breach of duties owed by them to KTO and KT as directors of those companies. 8 The proposed second cross-claim to which the present application relates also alleges against Mr Caplan, Mr Leslie and Mr Lesnie breaches of duties owed to KTO and KT by allowing those companies to incur costs in relation to these proceedings and by improper use of information about a hotel at Ultimo. 9 Assuming that he is granted leave under s 237, Mr McEvoy's standing to bring the proposed second cross-claim on behalf of KT will come from both s 236(1)(a)(i) and s 236(1)(a)(ii). He is a member of KT (he and Mr Caplan each hold one share) and a director of KT. In the case of KTO, his standing will come from his being a member of KT and its being a related body corporate of KT (see s 236(1)(a)(i)). 10 If Mr McEvoy were permitted to bring the proposed second cross-claim on behalf of KT and KTO, the proceedings would have a form such that (a) Metro and Transmetro sue KT and KTO for alleged wrongful repudiation of the management agreement and for a declaration that the agreement is still in full force and effect; (b) KTO sues Metro for a declaration that the management agreement was validly terminated by KTO; and (c) KT and KTO sue Mr Caplan, Mr Leslie and Mr Lesnie, as directors of KT and KTO, for breach of duty for having permitted or procured termination of the management agreement so that benefits could be given to a company (Aspen) in which those directors were interested. 11 Mr McEvoy is the managing director of Transmetro and Metro. In that capacity, he has a duty to see the principal claims of Transmetro and Metro duly and properly prosecuted. He is, in that capacity, committed to pursue and make good the allegation that the management agreement was not validly terminated by KTO and remains on foot for the benefit of Metro (and, indirectly, Transmetro). He is likewise committed to resist the contention of KTO that there was a valid termination of the management agreement. 12 As dominus litis of the proposed second cross-claim that he seeks to bring on behalf of KT and KTO, however, Mr McEvoy would be bound to contend that the management agreement was validly terminated (the position that KT and KTO take in the proceedings as presently constituted) and that Mr Caplan, Mr Leslie and Mr Lesnie brought about the termination for the purpose of causing their company Aspen to derive benefits. 13 It was submitted by Mr Newlinds SC, in arguing that leave under s 237 should not be granted to Mr McEvoy, that this position of conflict means that the court cannot make a positive finding on the matter in s 237(2)(c), that is, that "it is in the best interests of the company [ie, each of KT and KTO] that the applicant [ie, Mr McEvoy] be granted leave". 14 The Full Court of the Supreme Court of South Australia (Debelle J, Sulan J and Vanstone J) said of s 237(2)(c) in Ragless v IPA Holdings Pty Ltd [2008] SASC 90; (2008) 65 ACSR 700: "The effect of that requirement is that the court must be satisfied that it is in the best interests of the company that the applicant has leave to proceed on behalf of the company." 15 This paraphrase emphasises a particular aspect of s 237(2)(c), namely, that the inquiry is not confined to whether it is in the "best interests" of the company that the particular proceeding should be brought on behalf of the company. Integral to the inquiry is the question whether it is in the "best interests" of the company that the proceedings should be brought on behalf of the company by the particular person who seeks leave. 16 Several cases have considered, in the context of s 237(2)(c), matters said to go to the fitness of the particular applicant. In Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859, Brereton J said at [45]: "[T]he existence in an applicant of a personal interest in the outcome of a proposed derivative action, or even of a personal animus against the company, or other members of it, cannot be significant, let alone decisive; they are usual concomitants of the types of disputes which lead to derivative actions, and few if any such actions would be brought but for personal interest on the part of the relevant applicant and in the absence of animus against the company or other shareholders." 17 In Metyor Inc v Queensland Electronic Switching Pty Ltd [2002] QCA 269; [2003] 1 QdR 186, there was reference, at [18], to the kind of conflict that may arise when it is not clear whether property in issue is recoverable by the company or by one or more of its shareholders. Conflict of that kind was not seen as sufficient to take outside s 237(1)(c) a situation where one of the potential claimant shareholders sought leave to pursue the claim on behalf of the company. McPherson JA said at [18]: "If a particular asset is in law corporate property, the company ought to recover it; if it is not, one or other of the shareholders may perhaps be entitled to do so. Resolving such questions is the principal purpose that the proceedings are designed to serve. Against the risk that the plaintiffs may, in their own interest, be tempted somehow to misuse their authority in bringing proceedings on behalf of the company there is the safeguard afforded by the presence as defendants or opposing parties of the other shareholders in the company. They may fairly be expected to vigorously defend the interest they have in ensuring that the proceeds of any damages or assets recovered from them as defendants are restored to corporate funds, in which they will ultimately be entitled to participate by virtue of their own shareholdings in the company." 18 It was said in Joinery Products Pty Ltd v Imlach [2008] TASSC 40; (2008) 67 ACSR 520 at [34], after reference to Maher v Honeysett & Maher Electrical Contractors Pty Ltd (above), that "in assessing the best interests requirement the focus is on the company's interests and not the characteristics of the applicants". That may be so if characteristics are considered in isolation. But it does not follow that the characteristics of the applicant must always be ignored. If and to the extent that those characteristics are relevant to an assessment of where the best interests of the company lie, they must be taken into account. 19 A case in which a particular interest of the applicant (which may be regarded as a "characteristic" of the applicant) was taken into account in relation to s 237(2)(c) is Chahwan v Euphoric Pty Ltd [2008] NSWCA 52; (2008) 65 ACSR 661. There was there a finding that a particular interest on the part of the applicant for leave under s 237 meant that it was not in the best interests of the company that leave be granted to that applicant to bring proceedings on the company's behalf. Tobias JA (with whom Beazley JA and Bell JA agreed) referred to the decision of Brereton J in Maher v Honeysett & Maher Electrical Contractors Pty Ltd (above) and said at [89]: "Although Brereton J (at [45]) considered that the existence in an applicant of a personal interest in the outcome of a proposed derivative action cannot be significant let alone decisive as few if any such actions would be brought but for the personal interest on the part of the relevant applicant in doing so, in the present case the personal interest of the appellant in the outcome of the proposed action against Euphoric is of a different character to that of the interest to which his Honour was referring. The difference is that in the present case the personal interest of the appellant is one which, if established, will preclude Bycoon and its unsecured creditors (if any) from obtaining any benefit whatsoever from the successful prosecution of its claim against Euphoric with respect to the mortgage. How, in those circumstances, can it be said that the granting of leave to institute the proceedings will advance the separate and independent welfare of Bycoon?" 20 To understand the significance of what was said by Tobias JA, it is necessary to refer to the facts of that case. The applicant for leave under s 237 was Chahwan. He sought leave to bring proceedings on behalf of Bycoon Pty Ltd against Euphoric Pty Ltd. Chahwan alleged that Euphoric held certain property upon a constructive trust for Bycoon. It was to vindicate that alleged entitlement of Bycoon as against Euphoric that Chahwan wished to set Bycoon in motion to sue Euphoric. Chahwan also contended, however, that Bycoon held its interest in the property upon trust for him as bare trustee; or, in the alternative, that Bycoon's interest was subject to an equitable charge in his favour. 21 It was in these circumstances that Tobias JA said that Chahwan's own beneficial interest in Bycoon's property, if established, would preclude Bycoon from obtaining any benefit from the derivative action Chahwan wished to pursue on Bycoon's behalf. If Chahwan succeeded in showing that he was entitled to the interest he sought to have Bycoon establish as against Euphoric, the position of Bycoon would be the same, in essence, as if the derivative action had not been brought. Either way, Bycoon would have no established interest in Euphoric's property. 22 Chahwan v Euphoric Pty Ltd shows, in my opinion, that the position occupied, in the whole of the context of the litigation, by the applicant for s 237 leave may have a significant bearing on the s 237(2)(c) question whether it is in the best interests of the company that that applicant be granted leave. 23 In the present case, it is an essential element of the cause of action Mr McEvoy seeks to have KT and KTO pursue by means of the proposed second cross-claim that KT and KTO prove that the management agreement was validly terminated. It will be alleged against Mr Caplan, Mr Leslie and Mr Lesnie that they procured the termination for the ulterior purpose of enabling Aspen to obtain the management rights in place of Metro. It will be for Mr McEvoy, on behalf of KT and KTO, to make out this case. In doing so, he will have to prove that Aspen became the manager following effective termination of the management agreement as against Metro. 24 But Mr McEvoy will, at the same time, be duty bound as a director of Transmetro and Metro to pursue and make good the proposition that the management agreement is still in full force and effect and that Metro continues as the manager to the exclusion of Aspen. 25 The inconsistency between the two propositions for which Mr McEvoy will be compelled to contend is so stark that it is simply not feasible for him to play the two roles. The case is not one of a complicating or clouding interest. It is a case of positive duties in direct collision. By mounting the proposed second cross-claim for KT and KTO Mr McEvoy would be acting in a way that was in fundamental conflict with his duties as a director of Transmetro and Metro. The existence of those duties owed to Transmetro and Metro means that he is under equitable constraints forbidding his pursuit on behalf of KT and KTO of the case that must be made out for the proposed second cross-claim to succeed. 26 To grant the leave Mr McEvoy seeks under s 237 would be to give complete control and decision-making in relation to the second cross-claim of KT and KTO to a person who was, in equity, forbidden to espouse the cause that the cross-claim sought to promote and duty bound to strive for the failure of that cause. 27 This simply cannot be in the best interests of KT and KTO. 28 This is not to say that it may not be, at some point, in the best interests of KT and KTO for Mr Caplan, Mr Leslie and Mr Lesnie to be sued by those companies in the way Mr McEvoy envisges. But this will logically happen, if at all, once it is seen that the management agreement was validly terminated and Aspen in reality derived the benefit of becoming the manager of the hotel in place of Metro. 29 The conclusion I have expressed in relation to s 237(2)(c) is sufficient to dispose of the present application. There is no need for the other s 237(2) criteria to be addressed, although I would say that, given the substantial overlap between s 237(2)(c) and s 237(2)(b) ("the applicant is acting in good faith"), I am not persuaded that the s 237(2)(b) criterion is satisfied in this case. To satisfy s 237(2)(b), an applicant must show that he or she honestly believes that a good cause of action exists and has good prospects of success. I am quoting here something said by Palmer J in Swansson v R A Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313. A person duty bound, in the way I have described, to foster and pursue a case already pending which is irreconcilably inconsistent with the postulated cause of action must, as an objective matter, fail in that task. 30 The s 237 application brought by Mr McEvoy is dismissed with costs. **********

Transmetro Corp Ltd v Kol Tov Pty Ltd

At a glance

Court

Decision date

Before

Source

Judgment (12 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (6)

Cited By (5)